Mostly… fixed income and cross product eTrading

March 26, 2007

Who’d Be An Order Flow Intermediary?

Filed under: etrading, Nuts and Bolts — holky @ 3:52 pm

If the end game for etrading is with the customer system talking direct to the liquidity provider’s system, is any move of the existing platforms into the intermediary space to offer an “order routing+” service (so expanding on their FIX offering at present) a permanent move, or just breathing space while they find their ultiumate future to become the all-singing customer desktop (OMS?)

On the plus side, an intermediary can –

  • impose some form of “standard” over the commnunication, as all parties at least start with a single rules of engagement

  • simplify the connection itself; once you’re connected to an intermediary then as long as any new cpty is also connected to them it’s “just” an enablement and permissioning task to reach them

  • add value to the sellside; for example ensuring sellside get status information for the enquiry they didnt win; were they cover?, tied?, did it trade away or not trade?, and so on.  There is no guarantee that the customer would wish to provide this information in a genuinely direct connection, and even if they did, how far could you trust the information that is given?

But –

  • does the “standardisation” and value-add (above) imposed by the intermediary bring the same type of constraints that we see now regarding customer being able to do the type of order they really want?  less so than having the platform gui in the way, but does the intermediary need to recognise and add-value to particular types of transaction/product etc but just pass through anything else?

  • What is an acceptable cost for their involvement (whether annual fee, per transaction fee, connectivity costs), compared to d-i-y for direct connection to each client?
  • what latency does the intermediary introduce?  is there a valid argument that an enormous connection to an intermediary which aggregates all of the customer flow is “better” than individual and dedicated connections?  Should FI just look into the FX world to see the answer?
  • For those platforms that currently make their revenues from terminal license fees, how keen are they to change their fee structure in order to step into the orderflow intermediary space? – even those whose parent co is already doing this in equity space.  It’ll of course be a hugely tough sell to change from a free-to-execute service to a per-transaction cost, unless perhaps you have absolute dominance in terms of “important” customers connecting exclusively through that pipe.



  1. Are clients happy with the current RFQ model in Fixed Income markets? What is the opportunity for Broker/Dealers to move to order based market structures? Will the opportunity be lost to exchanges? What banks are moving in the direction of order based markets, even if slow markets?

    Comment by lacidar — April 2, 2007 @ 10:39 pm

  2. I think ingeneral they are, certainly for liquid product such as UST & EGBs. Request for Stream is another option but really isn’t that far removed from RFQ.

    There are a number of Hedge Funds & larger Funds that believe an exchange based model is inevitable in FI. In looking at this you have to understand their motives….they want liquidity & anonymity and look at the futures market enviously.

    Personally I’m not convinced the exchange model is the future for FI & it’s related OTC derivatives.

    Comment by waratah — April 4, 2007 @ 7:21 am

  3. Point taken on the migration to an “exchange model”. The question many now grapple with is, will order based markets become more of the norm as access to FI liquidity. This would give the customer more options at a lower cost (currently they have both TW for RFQ and BTEC/ESPEED for orders- MTS soon for orders in Europe but at a high cost and somewhat complex tech requirement). As hedge funds continue to attract more managed money and the steady migration of hedge fund talent to other traditional asset managers the FI market seems now ready for the shift and simply waiting for new access to make trading easier, cheaper, and DEFINATELY more automated. The follow question is how much longer will TW and Market Axxess make people click?

    Comment by lacidar — April 5, 2007 @ 12:24 am

  4. Agreed, have a look at a something I wrote earlier in the year:

    Essentially we need some form of “breakthrough idea”, could be exchange model, that will take e-trading to the next level & incorporate things such as increased automation & decreased latency.

    Comment by waratah — April 5, 2007 @ 7:27 am

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